For politics to eclipse football in Brazil as bar talk, something serious has to be going on.

Last week at the Bar California in downtown Sao Paulo, the waiter, Tattoo, was locked in debate with his customers.

"How can one man move so much money in his accounts in six years?" he asked. "He made withdrawals of R$250,000 [£60,000] at a time. No one can spend that kind of money shopping. Brazil is never going to get rid of this corruption."

As the Brazil-only final of the Copa Libertadores - South America's equivalent of the Champions League - was being played out in the background, what was exercising the bar's customers was a scandal that has rocked the political establishment of the country as well as many of its 186 million citizens.

The president of the ruling Workers' party (PT), Jose Genoino, was the latest to quit on Saturday after an aide to his politician brother tried to catch a plane with $200,000 stuffed in his luggage and underpants.

His fall follows that of other giants of the party - the treasurer, the secretary general and President Luiz Inacio Lula da Silva's own chief of staff - since the accusations broke. All maintain their innocence.

Now the talk is that President Lula himself may be on the way out, something unthinkable just a month ago. According to rumours emanating from Brasilia, the president may now step down in favour of his treasury minister next year.

Such a drastic development would send shock waves across Latin America, which has seen several leftwing leaders come to power in President Lula's wake.

The snowballing scandal broke on June 6 as the leader of the small Labour party, Roberto Jefferson, accused the Workers' party of making secret monthly payments of $12,500 to allies in Congress for continued support in passing legislation.

In what has become a new word in the Portuguese lexicon, the "mensalao" ("big monthly") allegations have plunged the country into crisis and the government into paralysis.

Almost daily, new revelations backing up Mr Jefferson's have come to the fore. The justice minister, Thomasz Bastos, said the federal police would investigate all top members of the PT, and Congress voted to open a new parliamentary inquiry into the mensalao allegations.

When he came to power in January 2003, President Lula became Brazil's first working-class president, elected on a huge wave of optimism that he would tackle poverty and social inequality.

Despite dire predictions before he took office, Lula has achieved a stable and growing economy, following the same broad financial policies as his predecessor.

The mensalao scandal has left a wake of disillusionment as the Workers' party was seen as a beacon of transparency in a country with a history of high-level corruption.

In 1992, Fernando Collor de Mello, the first president to be directly elected following the military dictatorship of 1964-85, fled to Miami during a hearing for his impeachment over missing government billions.

"In the history of the republic, no government has done even 20% of what we are doing to counter corruption. No one has more moral and ethical authority than I do," President Lula had claimed following the revelations.

In an attempt to shore up alliances, he gave three ministries to Brazil's biggest party, the PMDB, in a cabinet shake-up on the eve of his trip to the G8 summit.

He has so far avoided being directly tainted by the scandal, but the damage already done is clear. "The situation is serious, very serious," said Eliane Cantanhede, a columnist for the daily Folha da Sao Paulo newspaper. "No one believes in the government any more, or the ability of the president to command his troops.

"The country is in perplexity and disillusion. Brasilia is bubbling with rumours. Everything has stopped."

Businessman Marcos Valerio de Souza, accused of being the operator at the centre of the mensalao scheme, was grilled for 14 hours in a parliamentary inquiry being beamed live into Brazilian living rooms.

Tattoo, the waiter, was impressed. "I thought he came across really well. He lied, of course, but he did that thing, he lied really beautifully."